One of the greatest challenges to New Zealand business today is the inability of owners or founders of businesses to plan for succession, establish good governance and let go. Too many businesses reach turnover or profit level that cannot be improved without the founder handing over some daily decisions to others.
Founder CEOs wear many hats and play many roles. They often fall into the trap of thinking that their responsibility is to be the person who has all the answers, because their identities are so closely tied with their company. The founder falsely believes he or she is the final arbiter of conflicts, decisions and dilemmas.
A founder in this position often lacks confidence in second level management; is concerned that no one else really understands the process, market, clients or customers; can’t get commitment or passion from employees; and fears that involving others in the business at an ownership level is too hard or too risky. Invariably there has been no succession planning.
This approach can stifle business. It can reduce shareholder value as too much IP and goodwill rests with the owner, and can lead to premature sale of the business. When faced with the alternative of selling to private equity fund or addressing governance and succession issues, too many New Zealand companies are taking the easier option of selling. The alternative, although more difficult, is to see company succeed, grow, increase in productivity, remain in New Zealand hands and increase in shareholder value.
The options available include:
•Appointing non-shareholder CEO.
•Appointing able general managers in business development, customer relations, product development and operations.
•Incentivising performance.
•Identifying and training successors.
•Providing equity to promising senior employees to produce commitment and link performance with any results.
•Focusing on your strengths.
•Appointing independent board members tasked with introducing/establishing corporate governance.
•Preparing plan for succession and good governance and sticking to it.
•Appointing board members with range of skills – rewarding them and expecting them to perform.
Letting go does not mean selling out. The founder can and should remain as shareholder. The founder should consider whether he or she is best utilised as director or an executive within the organisation. Whichever role is taken should be clearly communicated to avoid confusion over lines of authority and governance/management distinctions.
It is essential that board include independent directors. They are able to be objective and insightful, and plan for the long term without the distraction of the effective decisions on their pay cheque if they were also employees.
Directors need more than desire to help out or drive to be director. They need to bring with them skills, knowledge and expertise that can help lead and drive the company. Respondents to the recent Directions 2006: Understanding Governance survey believe “directors should have track record of business success, good reputation in the market, and be capable of forming their own opinions”.
There are some good examples of New Zealand companies making the successful transition from founder/owner managed to corporate governance. The article on Brian Weatherly’s experiences at Software of Excellence in the May 2006 issue of The Director provided timely example of start-up company making the transition to company with good governance, management delineation and succession. Weatherly aptly pointed out that having four executives on the board was not good – the business was becoming unmanageable.
Instead of operational decisions being made by the management team, there was an unspoken understanding that if there were disagreement, they would take the issues to the board, which would ultimately make the decision. This meant the board became tied up in operational matters, devaluing its role. Weatherly saw the possibility of both management and board being destroyed. If operational decisions are made by the board, how do you make the CEO accountable? Once you have only the CEO on the board (as opposed to four executives), both board and management immediately start functioning properly. The delineation between governance and management is extremely important, and allows both the board and CEO to focus on their respective areas to lead company to greater productivity and profitability.
By Clayton Kimpton, chairman of partners at Kensington Swan. Among his other areas of interest, Kimpton specialises in governance.
